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Trasfer Price

Better home products Canadian operations are organized into two divisions: west and east. west division sells a component that could be used by east division in making one of the company's principal products. east division has obtained three price quotations from external suppliers for the component: $154, $138, and $143. examination of West division's accounting record pertaining to the production of the component reveals the following costs: direct materials, $56; direct labour $44; variable overhead, $18; fixed overhead, $25.

questions:
a) what savings (or profits) would be available to Better Home products if East Division bought the component internally rather than externally?

b) what would the transfer price be if the two division agreed to split the total company savings evenly between them?

c) assuming dual transfer pricing is used, set the maximum realistic price for West Division and the minimum realistic price for East division.

Solution Preview

Trasfer Price
Better home products Canadian operations are organized into two divisions: west and east. west division sells a component that could be used by east division in making one of the company's principal products. east division has obtained three price quotations from external suppliers for the component: $154, $138, and $143. examination of West division's accounting record pertaining to the production of the component reveals the following costs: direct materials, $56; direct labour $44; variable overhead, $18; fixed overhead, $25.

questions:

This situation involves the decision to set up the fair transfer price. As per ustransferpricing, "The "arm's-length principle" of transfer pricing states that the amount charged by one related party to another for a given product must be the same as if the ...

Solution Summary

Response discusses the steps to compute the Trasfer Price

$2.19